questions:

29 Doubt has been cast over the accuracy of the year 2 and year 3 maintenance costs for Machine 2. On further investigation it was found that the following potential cash flows are now predicted: Year Cash flow Probability ($) 18,000 0.3 25,000 0-7 w ww N N 23,000 0-2 24,000 0-35 30,000 0-45 What is the expected present value of the maintenance costs for year 3? A $26,500 $18,868 C $21,624 $35,173 30 Ridag Co is appraising a different project, with a positive NPV. It is concerned about the risk and uncertainty associated with this other project. Which of the following statements about risk, uncertainty and the project is true? Sensitivity analysis takes into account the interrelationship between project variables Probability analysis can be used to assess the uncertainty associated with the project Uncertainty can be said to increase with project life, while risk increases with the variability of returns A discount rate of 5% could be used to lessen the effect of later cash flows on the decision (30 marks)The following scenario relates to questions 26-30 Ridag Co operates in an industry which has recently been deregulated as the government seeks to increase competition in the industry. Ridag Co plans to replace an existing machine and must choose between two machines. Machine 1 has an initial cost of $200,000 and will have a scrap value of $25,000 after four years. Machine 2 has an initial cost of $225,000 and will have a scrap value of $50,000 after three years. Annual maintenance costs of the two machines are as follows: Year 2 Machine 1 ($ per year) 25,000 29,000 32,000 35,000 Machine 2 ($ per year) 15,000 20,000 25,000 Where relevant, all information relating to this project has already been adjusted to include expected future inflation. Taxation and tax allowable depreciation must be ignored in relation to Machine 1 and Machine 2. Ridag Co has a nominal before-tax weighted average cost of capital of 12% and a nominal after-tax weighted average cost of capital of 7%. 26 In relation to Ridag Co, which of the following statements about competition and deregulation are true? (1) Increased competition should encourage Ridag Co to reduce costs (2) Deregulation will lead to an increase in administrative and compliance costs for Ridag Co (3) Deregulation should mean an increase in economies of scale for Ridag Co (4) Deregulation could lead to a decrease in the quality of Ridag Co's products A 1 and 4 B 2 and 3 C 1 and 3 D 2 and 4 27 What is the equivalent annual cost of Machine 1? $90,412 $68,646 $83,388 $70,609 28 Which of the following statements about Ridag Co using the equivalent annual cost method are true? (1) Ridag Co cannot use the equivalent annual cost method to compare Machine 1 and Machine 2 because they have different useful lives (2) The machine which has the lowest total present value of costs should be selected by Ridag Co A 1 only Both 1 and 2 C 2 only D Neither 1 nor 225 ZPS Co also trades with companies in Europe which use the Euro as their home currency. In three months' time ZPS Co will receive